A long-time economic mainstay and the country’s primary employer, the agriculture sector makes up 9% of Sri Lanka’s GDP and is a significant source of foreign exchange. With the exception of rubber, all of the country’s major agricultural exports saw growth between 2010 and 2015. Export earnings increased during the same period, with agricultural exports comprising around one quarter of the total.
The sector includes an established plantation segment, producing mainly tea, coconut and rubber, and a less-established food crop production segment, which produces fruits, vegetables and other crops, predominantly for domestic consumption.
Major Employer
The sector provided employment to around 30% of the labour force. Despite the fact that 44% of its total area is under cultivation, Sri Lanka’s overall agricultural productivity remains low compared to countries at similar levels of development. The sector’s 9% contribution to GDP is significantly below that of Myanmar, for example, at 37.8%, according to the UN Food and Agriculture Organisation (FAO). However, Sri Lanka’s economy has industrialised at a faster pace than Myanmar’s, which has only recently opened itself up to outside investment. Nevertheless, the agricultural sector could be more productive. One reason for this is outmoded practices; a lack of land titles in rural areas feeds underinvestment in agricultural land, meaning that farmers do not rotate crops, invest in new planting or leverage their titles for development capital. The importance of Sri Lanka’s agricultural sector has been highlighted in recent years, with total consumption of all the major food groups increasing as the population grew from 19.1m in 2000 to 20.4m in 2012, according to the most recent national census.
A 2015 study by the FAO found that agricultural productivity needs to expand to meet increasing domestic demand for food and to provide employment in rural areas, which are home to more than 80% of the population. Domestic production accounts for almost 80% of all food consumption in the country, and the value of imported food has grown in absolute terms, though its share of total imports has remained flat, underscoring the importance of self-sufficiency.
Reduced Productivity
At the same time as domestic consumption is rising, the sector is being affected by climate change. Droughts, floods and temporal distributions of rainfall have reduced productivity. Rice, tea and rubber production are all down, largely due to weather patterns. The impact of climate change is expected to increase in the coming years, with the Asian Development Bank (ADB) forecasting that average temperatures in Sri Lanka could rise by 3°C by the year 2100, drastically affecting crops’ vulnerability to weather changes. The government provides support via free irrigation, subsidised fertiliser, price protection for rice and trade protection for selected crops. However, for the sector to expand and become more self-sufficient, the introduction of technology and the adoption of efficiency measures will likely be required.
Government Support
The government’s capital expenditure on agriculture and irrigation has fluctuated in recent years, ranging from 12% of total public expenditure in 2014 to 9% in 2015. That year, LKR54.5bn ($371.2m) of public funds was allotted to the sector, with irrigation and fertilisers making up the highest proportion of the spending, followed by seeds, planting materials, and research and development of land. The government also provides support by supplying irrigation to nearly half of the country’s agricultural land, introducing high-yielding crop varieties to farmers and subsidising fertilisers.
Fertiliser Subsidies
A change to the fertiliser subsidy programme was announced in the 2016 budget, with the government introducing a cash allowance scheme under which farmers would buy fertiliser from the market instead of receiving subsidised fertiliser from the government.
Under the new programme, Sri Lanka’s government is offering paddy farmers working with less than 1 ha of land an allowance of LKR25,000 ($171) for the two cultivation seasons.
In 2016 the government allocated some LKR37bn ($252.3m) for the programme, and in March 2016 the allowance was extended to cover coconut, tea and rubber farmers, as well as to all smallholders working with up to 2 ha of land.
Staying Sufficient In Rice
The cultivation of rice in Sri Lanka began in 161 BCE, when the kingdom of Anuradhapura and the country’s first capital were founded. The rulers of this and subsequent kingdoms built extensive reservoirs and irrigation systems for paddies to grow rice, some of which are still used by today’s farmers.
Rice is cultivated mainly on irrigated land in the dry zone – the North Central and North Eastern provinces – but smallholder farmers also grow some rice on non-irrigated paddy across the country. The staple is grown during two seasons: the Maha season, from September to March; and the secondary Yala season, from May to the end of August. Around 1.8m farmers are employed in rice cultivation, with the cereal being Sri Lanka’s most important staple crop, occupying 34% of total cultivated area.
While the country is currently self-sufficient in rice, production of Sri Lanka’s main food crop is falling due to below-average rainfall and low irrigation water availability. According to the FAO, these factors resulted in the area under cultivation in main producing sites shrinking by 50%.
The organisation projected that rice production would fall by 7% between the 2015 and 2016 seasons, from 4.8m tonnes to 4.5m tonnes, but that 2016 output would still be 9% higher than the five-year average from 2011 to 2015.
Recognising the necessity of lessening the impact of adverse weather and low water levels in the dry zone, the authorities are working to rehabilitate and maintain irrigation networks, construct reservoirs and hydroelectric plants, and encourage the adoption of technologies and techniques to enhance agricultural production.
Tea Time
As Sri Lanka’s top agricultural export commodity, tea is one of the country’s main foreign currency earners. Russia – the country’s single largest market – and the Middle East account for around 60% of tea exports, mostly of bulk black tea.
Sri Lanka is the world’s largest exporter of orthodox black tea, as opposed to the cut-tear-curl product favoured in neighbouring India. This is due largely to the high quality of Ceylon tea, which has been cultivated in Sri Lanka since the 1860s, and is praised around the world for its flavour.
Similarly to rice, however, Sri Lanka’s iconic tea industry is experiencing difficult times. According to the Sri Lanka Tea Board, output fell for the eighth month running in September 2016. Tea production that month totalled 19.8m kg, down 27% from the previous year’s 27.2m kg and the lowest since 1992, when Sri Lanka’s crops were hit by El Niño and only 2.6m kg of tea was produced. Industry stakeholders blamed drought, inappropriate fertiliser application, low market prices and a government ban on the use of herbicides for the drop in production.
“With higher production costs and lower labour productivity, Sri Lanka should be competing at the high-end segment of the tea industry,” Malik Fernando, director at Sri Lankan tea firm Dilmah Tea, told OBG. In a bid to boost the country’s tea industry, in September 2016 Navin Dissanayake, the minister of plantation industries, informed the Planters’ Association of Ceylon that he would lobby for the ban on glyphosate to be relaxed to allow for its use in tea production. The weed killer had previously been banned due to the possibility of its having contributed to an epidemic of chronic kidney disease in the country’s rice-growing areas.
Drop In Exports
Tea exports declined by 15% year-on-year in July 2016, with some industry insiders pointing to high taxes, and government constraints on imports and blending, as impediments.
Sri Lanka currently holds approximately 6% of the global tea market, with production growing by nearly one-third of the pace of the global average, according to Rohan Fernando, chairman of the Tea Exporters Association. Fernando told local press that tea is Sri Lanka’s highest-taxed export commodity, and is subject to four different taxes.
Furthermore, government constraints on tea imports impede blending for re-export, which Fernando said is essential if the country’s tea exporters are to gain a larger market share.
According to exporters, blending of Sri Lankan tea with foreign orthodox teas is necessary to address falling global commodity prices, with tea auction prices below the cost of production. There are fears, however, that blending would have a negative impact on the value of the Ceylon brand. Tea is only considered Ceylon if it is single-origin, and sourced from Sri Lanka, with the brand and reputation a major competitive strength, similar to grapes from France’s Champagne region or port wine from Portugal’s Douro Valley. Blending could therefore dilute the high value of the Ceylon brand.
Brewing Tensions
In addition to facing falling tea prices, along with increasing international competition from producers in Kenya, China, Vietnam and India, an 18-month “go-slow” campaign by estate workers affected production in the industry. Tea workers in the country’s 23 regional plantation companies were seeking to increase their daily wages from LKR624 ($4.25) to LKR1000 ($6.82).
In response, the management of the regional plantation companies closed factories and removed staff, claiming that the action was costing them LKR120m ($818,000) per day. Industry figures noted that labour costs account for more than 70% of these companies’ production costs.
The 18-month standoff was eventually settled with the signing of a collective agreement in October 2016 that introduced a new wage formula. This was composed of a basic daily wage of LKR500 ($3.40), a price-share supplement of LKR30 ($0.20), an attendance incentive of LKR60 ($0.41) and a productivity incentive of LKR140 ($0.95).
New Rates
Both tea and rubber workers who achieve a “daily norm” will earn LKR805 ($5.49) per day, with this amount including statutory dues as well as a benefits package. The settlement also includes a productivity incentive of LKR25 ($0.17) per kg of green leaf and LKR35 ($0.24) per kg of rubber harvested over and above the estate or divisional norm. The collective agreement is expected to cost plantation owners approximately LKR4bn ($27.3m).
Developing Rubber
Natural rubber production has become another major export earner, with Sri Lanka holding a 0.7% global market share and ranking as the 14th-largest producer in 2015.
The resource is heavily used in domestic manufacturing. An estimated 72m kg of raw rubber was used in local manufacturing in 2015, while 11m kg was exported. According to Ministry of Industry and Commerce figures, Sri Lanka is home to 485 rubber manufacturers, but the number is likely higher due to unregistered manufacturers.
Both export and production of rubber have decreased over recent years after the industry was hit by falling global commodity prices and adverse weather conditions. Sri Lanka produced 80,000 tonnes of natural rubber in 2015, down from 150,000 tonnes in 2011. Full-year exports were down 12.3% in 2015 and totalled just under $1bn, according to industry figures.
“We are facing difficult times in the rubber sector,” Rishad Bathiudeem, the minister of industry and commerce, told local press. “Issues such as the global market situation, supply-side constraints, lack of technology to modernise the sector and artificial rubber imports need to be resolved for the development of this sector.”
To address these issues, the government, working with industry stakeholders and international partners including the ADB and the government of Australia, implemented the Rubber Industry Master Plan (RMP), also known as the National Agenda for Rubber Industry Development, in 2017.
The plan has three key aims: to obtain maximum productivity from existing rubber plantations to ensure a supply of locally produced natural rubber for value addition; to make differentiated and branded products to add value to raw rubber; and to enhance infrastructure and regulatory support.
Additionally, the RMP aims to strengthen the sustainability of small-scale stakeholders and promote public-private partnerships (PPPs) in the industry. To that end, the RMP created the Sri Lanka Rubber Secretariat, a PPP of the main stakeholders that coordinates the process, and serves as a means of dialogue between the public and private sectors.
The 10-year plan will implement a total of 25 projects under 10 programmes to achieve targeted annual gross industry turnover of $4.4bn in 2025 – a 10% compound annual growth rate when compared to the base year of 2015 – with $3.6bn coming from manufacturing, $448m from raw rubber production and $362m from rubber wood-based products. In addition, the authorities are expecting the share of the country’s annual total export value to increase to 15%, up from the current 8%.
Skilled Labour
Officials are also working to address a dearth of skilled labour, which is an issue that is endemic to the industry. Growth in Sri Lanka’s rubber industry will depend on manufacturers’ ability to address the current shortage of rubber manufacturing and technology skills in the segment.
With this issue in mind, the Ministry of Industry and Commerce – along with the Plastics and Rubber Institute of Sri Lanka – contracted India’s Cochin University of Science and Technology to train 25 Sri Lankan rubber industry technicians in the latest technologies. The ministry is sponsoring an additional 25 students to attend the graduate programme of the Plastics and Rubber Institute of Sri Lanka, and has bought an LKR9.4m ($64,100) rubber injection-moulding machine from Taiwan to enable small and medium-sized enterprises in the industry access to rubber mould testing equipment.
Sugar High
Sri Lankans consume 700,000 tonnes of sugar a year, spending LKR35bn ($23.9m) to import 644,000 tonnes, with the country’s factories manufacturing the remaining 56,000 tonnes. Sri Lanka’s current sugar manufacturing factories operate on 26,000 ha of land.
The authorities are looking to boost indigenous sugar production and value-added manufacturing, and ultimately make the country self-sufficient in the commodity. In October 2016 a new sugar development initiative was implemented that will boost the area of cultivated land and establish 15 new manufacturing plants, with the aim of producing 50% of Sri Lanka’s sugar locally by 2020, and making the country self-sufficient by 2025. Standards will be enforced to ensure quality sugar cane cultivation and infrastructure improvement is undertaken to boost cultivation under the plan.
Incentives For Small-Scale Farmers
The plan, which will be executed in two stages, identified 104,000 ha of land to be developed for sugar cultivation in the areas of Moneragala, Batticaloa, Kilinochchi, Anuradhapura, Trincomalee, Ampara, Badulla and Polonnaruwa. The scheme included participatory incentives for small-scale farmers that would enable them to earn a minimum of LKR30,000 ($205) per month, well above the agriculture industry-wide average of LKR12,541 ($86).
The plan is also expected to benefit local consumers by making sugar and sugar by-products more affordable. The current production cost for sugar by-products, LKR98 ($0.67) per kg, is expected to fall to LKR70 ($0.48) per kg, with the savings passed on to consumers. Private sector investment will be incentivised in the plan, under which an investment policy framework will be implemented to include key judiciary, legislative and regulatory reforms.
Separately, one of the largest sugar refiners in North Africa has announced plans to assist in the revitalisation of Sri Lanka’s sugar sector. In October 2016 Algeria’s Cevital said that it will invest €150m in the industry via the construction of a refinery in the Southern Province, according to local media reports. According to Cevital, the facility will produce 1m tonnes of sugar per year within two years, saving the country huge sums in foreign exchange.
Adjusting To Climate Change
In recent years droughts, floods and changing monsoon patterns have done significant damage to Sri Lanka’s agricultural harvests. Studies conducted by the ADB raised flags concerning poor yields in the country’s tea sector, which the bank said could be cut in half by 2080 due to the side effects of climate change.
However, tea yields are not the only concern in this regard. Climate change is also having a negative impact on the country’s ability to secure adequate food resources for its population.
According to the World Food Programme (WFP), Sri Lanka’s otherwise rapid economic development has been “scuttled” by weather events. “The increased frequency of natural disasters such as drought and flash floods further compounds food and nutrition insecurity,” the WFP noted.
To help it meet the challenges, in 2011 Sri Lanka adopted the National Climate Change Adaptation Strategy, laying out a prioritised framework for action aimed at improving the country’s resilience to climate change. The strategy outlined adaptive measures for agriculture, livestock and fisheries, including water-efficient farming methods, crops to improve water productivity, improvements to water storage units such as tanks and reservoirs, and the promotion of land-use planning.
Highly Vulnerable
“We are highly vulnerable to the adverse effects of climate change, such as extreme weather patterns, which result in devastating floods or severe drought,” Rohan Perera, Sri Lanka’s ambassador to the UN, told participants in a climate change meeting in March 2017.
“These adverse effects inhibit our quest for sustainable development. We have identified adaptation as the most suitable way to face the challenge of climate change,” said Perera, noting that the National Climate Change Adaptation Strategy is the cornerstone of this endeavour.
The country is also working to develop green agricultural techniques, including soil conservation, water efficiency and organic farming methods.
Investment Incentives
Sri Lanka’s Board of Investment (BOI) has identified agriculture as one of its priority areas for investment, highlighting the cultivation of crops, livestock, medicinal plants, floriculture, ocean and inland fisheries, and forestry as key to economic development. A range of incentives is being offered by the BOI to spur private investment, such as tax holidays and exemptions from Customs duties and exchange controls.
The board has released a spate of tenders for major projects in the agricultural sector in recent months, with the aim of increasing foreign direct investment (FDI) and development within the sector.
In September 2016 the BOI released tenders seeking an FDI investor for two projects. The first was for the construction of the 142-ha agro-processing zone at Pollebadda, in the northern district of Mahaoya. In addition to various fiscal and tax incentives, the government will provide this project’s investors with supporting infrastructure including access roads, water and electricity supply, and industry-standard factory buildings for the processing plants.
The second tender was for the construction of an agro-processing zone to facilitate animal husbandry and dairy in Welikanda, in the North Central Province. The opportunity also includes cultivating cash crops by using annual rainfall patterns, agro-wells and rainwater-harvesting methodology.
In addition, the BOI is looking to boost investment in the country’s plantation industries. Another tender was released in September 2016 for an FDI investor or joint-venture partner to set up a factory to produce tyres, tubes, rubber-based motor spare parts and rubber-based toy products for export to develop the value-added rubber industry in Sri Lanka. The proposed factory, which will be located within Magampura Mahinda Rajapaksa Port, has an investment value of some $5m.
Outlook
Government plans to increase the domestic production of rubber and achieve self-sufficiency in sugar could grant the country significant foreign exchange savings and develop its value-added services. “There is now also space to shift focus to diversification and the promotion of high-value and export-oriented food crops,” Françoise Clottes, the World Bank’s country director for Sri Lanka, said in a statement. “This shift in approach is crucial for income growth, poverty reduction and reversing the trend in increasing inequality, as well as better nutritional outcomes in the country.”
Building on Sri Lanka’s strong reputation for high-quality Ceylon tea, whether through niche marketing or through blending aimed at export expansion, also has the potential to drive growth in the sector. Water management, and improved irrigation and water storage facilities, are the first steps towards dealing with the drought conditions that stymied rubber and rice production in recent years. Forward-looking and aggressive efforts to attract FDI are expected to bring more development and much-needed modernisation to the sector.
“Innovation and new technology will help improve not only the economic efficiency in the sector, but also enhance resilience to natural disasters and climate change,” Ulrich Schmitt, programme leader and task team leader at the World Bank, said in a statement, noting that the government’s supportive regulatory environment and policies are conducive to sector modernisation (see analysis).
While relatively high labour costs, depressed commodity prices and unfavourable environmental conditions are among the significant challenges facing Sri Lanka’s agriculture sector, competitive advantages – such as those it enjoys in plantation crops, for example – will help it to remain resilient. The country has been boosted in recent years by the efforts of both the government and private sector stakeholders to identify areas that are ripe for development, encourage climate change adaptation and attract foreign investment, all of which signals continued opportunities for growth.
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